Public Information Notice: IMF Concludes 2003 Article IV Consultation with Bangladesh

July 11, 2003

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2003 Article IV consultation with Bangladesh is also available.

On June 20, 2003, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Bangladesh.1


Since the last Article IV consultation, economic performance has improved and macroeconomic policy implementation has strengthened, broadly in line with the recommendations of the Board. The economy has been in a recovery, led by the agricultural and industrial sectors and aided by the strength of domestic and external demand. Real GDP growth is thus projected to accelerate to 5.2 percent for FY03 from the 4.4 percent growth rate recorded in FY02. At the same time, inflation remains manageable, although it is on a slight upward trend to around 5¼ percent, owing to rising food prices which were linked to higher utility tariffs and energy prices.

The external position has also strengthened over the past year. Following a fall in exports in FY02, due to a sharp decline in ready-made garments (RMG) prices, exports have recovered, rising by 6 percent in the ten months through April 2003. During the same period, remittances continue to be strong, growing at an annual rate of 24 percent, reflecting in part a further shift in such flows to official channels. The current account is projected to remain in a small surplus for FY03. International reserves have increased to nearly $2 billion as of mid-June, and are projected to rise further to $2.1 billion by end-June 2003.

Prudent macroeconomic policies have contributed to these outcomes. In particular, fiscal policy has been tightened beginning in FY02; revenue was raised by 1 percentage point of GDP, mainly in the nontax area. As a result, the central government deficit (excluding grants) fell to 4.7 percent of GDP. At the same time, the monitoring of fiscal developments was strengthened, especially with respect to Annual Development Plan (ADP) spending.

Moreover, the deficit is on course to fall further in FY03 to 4.2 percent of GDP in line with the budget as a result of significant revenue measures combined with expenditure discipline. Tax revenue in the first seven months of the year rose by 16.7 percent, compared to the same period of FY02, suggesting that tax revenue for the year is on track to improve by 0.6 percentage points of GDP. At the same time, expenditures in the first seven months fell by 0.8 percentage points of GDP, reflecting restraint in ADP spending. This result was achieved despite a marked increase in expenditure to meet reform costs of state-owned enterprises (SOEs) (0.4 percent of GDP). More recently, the ADP budget has also been revised downward, to further prune lower priority spending.

Further, the structure of financing for the deficit in FY03 has improved. Domestic financing is expected to be cut from 2.5 percent of GDP in FY02 to 1.9 percent. Moreover, based on trends so far, the share of domestic financing through costly national savings certificates (NSCs) is expected to fall. To reduce future interest burden, interest rates on NSCs were reduced by 2 percentage points and the four most costly NSC schemes were withdrawn in July 2002.

Monetary policy has been restrained since early 2002, and treasury bill rates have been allowed to rise, reflecting market conditions. In the year to March 2003, reserve money is estimated to have grown by 6 percent, as Bangladesh Bank (BB) sterilized its accumulation of international reserves with auctions of treasury bills. As a result, short-term treasury bill yields rose from 4 percent to 8 percent over the period; at the same time, commercial lending rates remained at about 12 percent. Broad money grew by 15 percent in the year to February 2003, buoyed by strong growth in credit to the private sector.

Exchange restrictions have recently been eased, and exchange rate management has been more flexible, helping to strengthen the external position. In particular, the scope of the margin requirements on letters of credit for imports has been reduced, and limits were lifted in August 2002 on travel, educational and medical expenses, and on payments for other invisibles. Nonetheless, Bangladesh continues to maintain exchange restrictions subject to Fund jurisdiction. The exchange rate for the taka remained fixed to the U.S. dollar from January 2002 until May 31, 2003, when the taka was allowed to float. With the weakening of the U.S. dollar, during the period January 2002-May 2003, the taka has depreciated by 12 percent in nominal effective terms and by an estimated 8 percent in real effective terms.

The authorities recently have limited the contracting of new nonconcessional external debt. During FY03, new loan commitments and guarantees on nonconcessional terms are projected to be at most $150 million, down from an estimated $350 million in FY02. External public debt at end-June 2003 is projected at $17 billion (33 percent of GDP). In view of its concessional nature, debt in NPV terms is about 20 percent of GDP and 101 percent of exports, while the debt service ratio remains relatively low at 6.5 percent.

Steps have been taken to renew structural reforms. With respect to manufacturing, the government has initiated a four-year program to phase out SOEs from this sector, starting with the closure/privatization of key loss-making units. In addition to Adamjee jute mills, another 24 out of a total of 150 SOEs have been closed so far in FY03. To ease this process, a severance scheme has been adopted to provide safety nets for retrenched workers. In the energy sector, the focus so far has been on tariff and pricing adjustments, to stem financial losses. Since October 2001, utility tariffs have been raised by 8 percent, and the prices of a wide range of energy products have been substantially increased. In addition, Parliament has recently passed the Energy Regulatory Commission Act, creating an independent regulator for the sector.

In the banking sector, the priority has been on improving the legal framework and upgrading prudential standards. The Bangladesh Bank Order was amended to provide greater operational autonomy to BB. The Banks (Nationalization) Act and the Banking Companies Act were also amended to strengthen BB's regulatory powers by bringing nationalized commercial banks (NCBs) within its purview and to improve capital adequacy and governance in private commercial banks. Moreover, a new Money Loans Court law was enacted that establishes specialist courts to deal with loan defaults and streamlines the recovery process.

Trade reform was given renewed impetus in the FY03 budget, when the top customs duty rate was reduced by 5 percentage points to 32.5 percent, and the number of rates reduced to five (including a zero rate). The structure of supplemental duties was also simplified by reducing the number of rates from 31 to 5. The effective average tariff rate was thus reduced to 24 percent.

Executive Board Assessment

Directors commended the authorities' prudent macroeconomic management and renewal of structural reforms, which strengthened economic performance in the past year. Economic growth is buoyant, inflation remains moderate, and international reserves have risen. The major challenge facing Bangladesh now is to put the economy on a higher growth path with faster poverty reduction. Directors noted that impediments to private sector growth, a weak banking system, limited public resources, and natural disasters have held up progress toward achieving this goal.

Directors considered Bangladesh's National Poverty Reduction Strategy (the I-PRSP), to be a coherent and comprehensive policy framework for boosting economic growth and reducing poverty. They emphasized that poverty reduction will require macroeconomic stability and an improvement in the investment climate. For this, the authorities will need to accelerate structural reforms, ease bottlenecks in physical infrastructure, further invest in human capital, and strengthen governance. Directors encouraged the authorities to more sharply prioritize pro-poor policies and programs in framing the full PRSP, to ensure a full costing of these programs within a medium-term expenditure framework, and to broaden further the participatory process, particularly to include parliamentarians, to enhance political support for the reform agenda. Furthermore, monitoring mechanisms should be established to gauge the progress in reducing poverty and, in this context, additional work should be undertaken to better define final outcome indicators.

Directors endorsed the macroeconomic framework and the emphasis of the proposed Poverty Reduction and Growth Facility (PRGF)-supported program on fiscal reforms, restructuring and privatization of the nationalized commercial banks (NCBs) and state-owned enterprises (SOEs), more liberal exchange and trade regimes, and improved economic governance. They stressed that for the structural reforms to be successfully implemented, the underlying economic governance issues will need to be decisively tackled. In this context, improved accountability in public resource management, judicial reform, and the proposed establishment of an anti-corruption commission would be especially helpful.

On fiscal reform, Directors welcomed the reduction of the fiscal deficit in fiscal year 2002/03 and the budget framework for fiscal year 2003/04, which is consistent with a pro-poor growth strategy. Directors noted the low revenue effort, and underscored the importance of action to boost revenue, particularly in view of intended trade liberalization. They endorsed the extension of the coverage of the VAT and income tax and the strengthening of tax administration. On the expenditure side, Directors welcomed the planned shift in budget allocations toward financing of structural reforms, poverty reduction and the social sectors (especially education), and the critical energy and power sectors. To achieve the targeted allocation, it will be important to improve development project selection and implementation, as well as transparency and accountability in expenditure management, drawing on the recommendations of the fiscal ROSC.

Directors stressed that continued fiscal reform over the medium term will be vital, and should center on a sustained revenue effort and a shift in spending toward investments in infrastructure and human capital to better support growth and the Millennium Development Goals. However, while they welcomed the increased budgetary allocation to education, they stressed that the effectiveness of social spending is at least as important, and encouraged the authorities to draw upon the findings and recommendations of last year's public expenditure review in guiding the projected increase in spending. To support poverty reduction, it will be important to promote the development of the rural sector, including through a better functioning of land markets and through sound microfinance policies. For public debt sustainability, Directors called on the authorities to curtail domestic financing for the budget, to exercise prudence in external debt management, and to refrain from non-concessional borrowing. Moreover, public debt management should be strengthened, starting with an improved debt information system.

Directors welcomed the recent tightening of monetary policy and the greater flexibility in interest rate policy, which contributed to the successful float of the exchange rate. They stressed that monetary policy would need to remain firm in the period ahead in order to contain inflationary pressures, support orderly conditions in the foreign exchange market, and facilitate a further rebuilding of international reserves. Over time, the authorities would need to address some of the recommendations in the Financial System Stability Assessment (FSSA) report regarding monetary policy instruments. The completion of the safeguards assessment of the central bank was welcomed, and the authorities were urged to address the critical weaknesses quickly.

Directors endorsed the authorities' SOE reform plan for the manufacturing sector, noting the orderly divestment of key loss-making units so far aided by the safety nets for retrenched workers. They encouraged the authorities to maintain the momentum of this reform, so as to substantially withdraw SOEs from this sector within three years as planned and make room for the private sector.

Directors stressed that the serious problems of SOEs in the energy sector would also need to be decisively addressed, in order to contain fiscal risks and ease critical infrastructure bottlenecks. They welcomed recent pricing actions, which have helped stem the financial losses of the sector, but stressed that the effect of price increases on the poor should be mitigated through a well-targeted social safety net. Directors encouraged the authorities to make further progress, in consultation with the World Bank, by moving in a timely way to implement an automatic pricing framework for energy, starting with adoption in the near term of an interim pricing formula. An effective regulatory body should also be installed soon, now that the legal framework is in place. In addition, Directors attached importance to resolving the inter-enterprise arrears of SOEs in this sector in the context of an appropriate restructuring, and to defining the next phase of reforms so as to permit a higher level of investment in this sector. Plans to improve the pricing and regulatory framework were considered an important first step, but the goal should be eventual privatization of the key enterprises. A few Directors noted the delay in the corporatization of the Telephone and Telegraph Board, and urged timely implementation of the process.

Directors welcomed the recent upgrading of the legal framework for banking regulation and loan recovery, as well as the strengthening of Bangladesh Bank's operational autonomy and supervision over the NCBs. They considered the proposed approach to NCB reform to be a cautious but meaningful start to addressing the weaknesses in this area and in the financial sector more generally. The planned audits of these banks should help in defining a resolution strategy for each bank by April 2004, drawing also on the findings of the FSSA. Some Directors strongly concurred with the recommendations of the FSSA that all NCBs should be sold off, and suggested that privatization be included in the resolution strategies. Directors emphasized the need in the interim to strengthen oversight of NCBs and bank management, to restrict NCB lending, and to forcefully address the problems of directed lending and outside interference in the management of these banks. Directors also called on the authorities to strengthen anti-money laundering legislation to address terrorism financing issues and clarify the powers of the financial intelligence unit, and to upgrade capacity for enforcing the legislation.

Directors welcomed the recent move to a floating exchange rate regime, which will offer greater flexibility in macroeconomic policy management, better protect competitiveness, and enhance Bangladesh's resilience to shocks. Directors stressed that more will need to be done over the next two years to rationalize import taxes, reduce the effective rate of protection, and remove the anti-export bias, especially in order to diversify exports and reduce external vulnerability.

Noting that the authorities have proposed timetables for eliminating the restrictions with respect to the margin requirements for imports and the nonresident taka accounts, Directors approved these restrictions on a temporary basis. However, a few Directors were concerned that these timetables had slipped relative to the previous undertakings. The authorities were urged to set a timetable for eliminating the remaining restriction on advance payments for imports.

Bangladesh: Selected Economic Indicators, FY00-04 1/












National income and prices (percent change)


Real GDP 2/






GDP deflator






CPI inflation (annual average)






Central government operations (percent of GDP) 3/


Total revenue


















Total expenditure






Current expenditure






Of which: Interest payments






Annual Development Program






Extraordinary expenditures






Other expenditures 2/






Overall balance (excluding grants)






Primary balance






Financing (net)


















Total central government debt (percent of GDP)






Money and credit (end of year; percent change)


Net domestic assets






Private sector






Broad money (M2)






Money velocity






Balance of payments (US$ millions) 4/


Exports, f.o.b.






(Annual percent change)






Imports, f.o.b.






(Annual percent change)






Gross official reserves (US$ millions)






In months of imports of goods and nonfactor services






Memorandum item:


Nominal GDP (in billions of taka)






Sources: Data provided by the Bangladesh authorities; and IMF staff estimates and projections.

1/ Fiscal year begins July 1.

2/ Consists of other capital, net lending, and food accounts (including check float and discrepancy).

3/ Starting FY02, central government fiscal positions are presented on a gross basis.

4/ Balance of payments is presented on the basis of BPM5.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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